Since the 1970’s the traditional LLC has been the business entity of choice for smart business owners and investors. These popular LLCs are a type of “pass through” entity that make up a huge chunk of U.S. companies. At this point, you may be wondering “what’s a pass through entity?” In this article, we’ll answer this important question and review the basics of a traditional LLC. Don’t waste hours going down the LLC rabbit hole. Here are the three basics of a traditional LLC and how to start a traditional LLC today.
The Traditional LLC is a Pass Through Entity
The traditional LLC is considered a pass through entity because its profits and losses pass through the individual. This is why profits and losses are reported on the personal tax return, as opposed to a separate business filing. Although the LLC’s financials are filed within the personal tax return, the individual still enjoys protection from personal liability in the case of any negative action related to the LLC. In this sense, the traditional LLC provides owners with the same protections as they would get with a corporation.
The Traditional LLC’s Protection in Action
Let’s look past the abstract and examine a practical example of an LLC providing personal protection. Think of the case of my good friend Kelly. Like many of you, she’s a real estate investor. A tenant claims that she was injured in one of her properties. The tenant wants to hold Kelly accountable for negligence in maintaining some wood paneling which collapsed causing minor injury. A lawsuit would do tremendous damage to Kelly’s name. However, under an LLC, Kelly as a member can’t be named in the lawsuit. Members or managers of an LLC are insulated from personal liability. Thus, Kelly can enjoy the potential profits of real estate investing without assuming the high personal liability. The liability associated with real estate is no exaggeration. We’ve seen several prudent investors hit with frivolous lawsuits in connection with their property. Don’t wait until that day comes. We specialize in creating proactive asset protection plans.
How to Setup a Traditional LLC
These are the two main documents to file when forming a traditional LLC:
- Articles of Organization. This is usually filed with the state’s LLC division. Today, several states provide a simplified one page form. Here you will list name, contact information and other basic information regarding the LLC. Note that the filing fee can range from $100 to $800.
- LLC Operating Agreement. While this is not mandatory for state registration, it’s a must for specifying member rights, responsibilities and profit shares.
The Traditional LLC vs. the Series LLC
We see only rare cases where real estate investors hold a single asset requiring LLC protection. In most cases, investors handle multiple assets. However, it’s not cheap to form an LLC for each. You don’t want to protect one from liability, yet leave the others exposed. Yet, you don’t want to pay upwards of $800 and maintain separate administration of each. The solution is the series LLC. We’ve already discussed the benefits of a series LLC. However, not every state recognizes this entity. We can help you setup either a traditional or series LLC based on your state requirements and liability protection needs. Call us today at 512-757-3994 for a consultation.